A view that the Reserve Bank does not lower the repo rate higher than inflation expects

Mumbai, Ta. 15 January 2020, Wednesday

With the Consumer Price Index-based inflation rate rising to 8.5 percent on December 2, the Reserve Bank has not been able to reduce interest rates at its next review meeting. The Reserve Bank has kept the inflation target between 3 and 5 percent.

After February 3, the Monetary Policy Committee (MPC) of the Reserve Bank reduced the repo rate by a total of 5 basis points. Interest rates were maintained at the December meeting. The interest rate was maintained by saying that the RBI wanted to see the effect of the reduction in the basis points.

Now that inflation has reached a critical level, analysts are confident that MPC will maintain the repo rate in February and April meetings. Not to be surprised if this situation persists for a long time, said one analyst.

Inflation has increased due to its impact on the price of vegetables including onions in December. However, prices have been falling since the government decided to import onion. However, due to the base effect, January inflation is likely to remain high. However, for November, the rate was 8.5 percent. The overall inflation rate is increasing due to the impact of the increase in food prices.

Inflation has become a difficult situation for the growing bond market. Inflation was expected to rise but was not expected to rise so fast, another analyst said. With pressure on bond yields, the Reserve Bank will be forced to undertake more open market operations.

In addition to maintaining the repo rate, the Reserve Bank is also advocating that its policy stance will continue to be commoditized.